The De Facto and Estoppel Concepts in the LLC Context: Still Birth or Stunted Growth?

Abstract The limited liability company (“LLC”), within a short period since its entrance into the American legal landscape in 1976, has seen a meteoric rise as the business form of choice for many investors. The lack of complete compliance with the statutory requirements for organizing a business, which has posed problems in older business forms, has also found its way into the LLC arena and is only likely to escalate as the popularity of the LLC continues to grow. The consequence has been exposure of business organizers and subsequent investors to ruinous personal liability for business obligations. In response, some courts have adopted a “de facto corporation” and “corporation by estoppel” analyses in shielding the organizers from liability. This judicial attitude, however, is not widespread prompting the comment that ‘the concept of de facto LLC is still evolving.’ This article traces the evolution through a survey of judicial and legislative trends in the development and application of the notions of de facto LLC and LLC by estoppel in all 50 states. It also provides a thorough examination of the arguments in favor and against the application of the concepts in the corporate and partnership contexts. Using that as a basis, it makes a case for the qualified application of the concepts in the LLC context to protect innocent investors and credible creditors.